National legal systems routinely contain special provisions to be used for evaluating General Terms and Conditions of Business (GTC), and German law is no exception. Clauses that qualify as general terms and conditions of business are automatically subject to this rigorous scrutiny. If they do not withstand scrutiny, they are deemed void. These provisions considerably restrict the general principle of freedom to form contracts.
It is not only texts that are entitled ‘General Terms and Conditions of Business that are subject to this scrutiny of their content, but also any contractual conditions preformulated for multiple contracts that the user imposes on the other party to the contract on conclusion of the contract. Only conditions that the parties to the contract have individually negotiated in detail are not covered by this definition. Case law’s requirements for ‘negotiation’ are, however, very strict, so that many contracts are entirely or at least largely subject to the thorough scrutiny of content for GTC. It should be noted that large parts of this content scrutiny extend beyond consumer contracts to entrepreneurial legal transactions. In practice, when using data processing we almost always make recourse to specimens, forms or at least boilerplate text. These qualify as general terms and conditions of business, they are formulated in advance and are directed at a variety of customers. Even voluminous contracts for economic transactions, which entail intensive negotiations, usually with the involvement of lawyers, are subject at least in part to the rigorous content scrutiny for GTC.
Scrutiny of content taking limitation of liability as an example
What is the consequence of a contract clause being subject to GTC scrutiny? Let us take the example of a limitation of liability clause for corporate transactions. Almost every enterprise uses one to limit its own liability. Dutch entrepreneurs in particular are regularly surprised by how restrictive such a limitation according to German law is. According to German Federal Court of Justice case law, in order to be valid they must not affect the ability to compensate the foreseeable damages typical of the contract. In addition, liability for gross negligence and intent, liability for physical injury and product liability cannot be excluded. Accordingly, only liability for simple negligent breaches of non-material contractual obligations – which are virtually irrelevant – can be freely limited. GTC that further limit liability soon come up against GTC content scrutiny and are therefore void.
Negotiated contract clause
When, however, is a clause regarded as having been individually negotiated and not, therefore subject to GTC scrutiny? The Federal Court of Justice applies strict requirements where negotiation is concerned. These requirements are less strict for transactions between entrepreneurs than for consumer contracts, but are often assumed to be much stricter. According to established case law, negotiation is more than merely bargaining and requires that the GTC content that deviates from the law is put up for serious negotiation and the customer is given the genuine opportunity to influence the content of the contractual conditions. This is regularly reflected in an amendment to the preformulated text. In a pronouncement of January this year, the Federal Court of Justice once again stated the strict requirements (judgment of 20 January 2016 – VII ZR 26/15):
Contractual terms are not imposed if the inclusion of preformulated conditions in a contract is based on a voluntary choice of those confronted with their proposed use by the other party to the contract. For this it is necessary for the party to be free to select the contractual texts in question and, in particular, to be given the opportunity to contribute its own, alternative suggested texts with the actual possibility of enforcing them in the negotiations. Accordingly, an imposition of contractual conditions does not lapse even if the preformulated contractual conditions are sent to the other contracting party requesting comments or desired changes. Even if it is not customary in entrepreneurial transactions to give the other contracting party opportunity to comment on the proposed contractual conditions, or to express desired changes, a supplement to this content in a covering letter accompanying the signature-ready contract text at best leads to indication of a certain willingness to negotiate. This does not, however, sufficiently express the fact that the customer is simultaneously being offered the opportunity to contribute its own proposed text and to enforce such as the case arises.
Anyone wishing to assert that a typical, beneficial GTC clause has been freely negotiated will routinely have to provide evidence thereof in the event of a dispute. The user must be willing to negotiate the contract’s content and this willingness must be unambiguously declared to the customer and be serious. Completely immaterial amendments, blanket additions such as ‘following detailed negotiations’ and similar are generally not sufficient according to the case law. What is required is ideally detailed evidence, which can be taken seriously, that each individual clause really was fully open to negotiation. The customer must be given the genuine possibility of influencing the contractual conditions’ content. As a rule, the negotiations are reflected in amendments to the preformulated text. Returning to the example of the limitation of liability: if an entrepreneur wants to limit his liability, for example his liability for grossly negligent actions, then this is possible only by means of an individually negotiated clause. For this, he must put up the limitation of liability for negotiation vis-a-vis the contracting party and, if an agreement is reached, the contracting party must receive adequate compensation (e.g. with regard to the price). Unilateral imposition would lead to the whole clause being void. Care should also be taken that this mutual give and take and thus the agreement’s individual nature is adequately documented. It remains to be seen whether this is achievable in practice.